Q3 2021 Tyson Foods Inc Earnings Call
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Back in 19, and 35, John Tyson motto was when better chickens or.
Good morning, everyone and welcome to the Tyson Foods third quarter 2021 earnings Conference call.
All participants will be in a listen only mode.
Need assistance. Please see the conference specialist by pressing the star key followed by zero.
After todays presentation, there will be and opportunity to ask questions John.
Ask the question you May press Star and then 1 using of Touchtone telephone.
John Your question, you May press Star and 2.
Please also note that todays event is being recorded.
At this time I'd like to turn the conference call over to Megan Britt Vice President of Investor Relations Ma'am. Please go ahead.
Hello, and welcome to the third quarter of fiscal 2021 earnings conference call for Tyson Foods.
On the call today are Donnie King President and Chief Executive Officer, and Stewart, Glendinning, EVP and Chief Financial Officer.
We have prepared presentation slides to supplement our comments and these are available on the Investor Relations section of the Tyson website and through the link to our webcast.
During this call we will make forward looking statements regarding our expectations for the future.
These statements are subject to risks uncertainties and assumptions, which may cause actual results to differ materially from our current projections.
Please refer to our forward looking statement disclaimers on slide 2 as well as our SEC filings for additional information concerning risk factors that could cause our actual results to differ materially from our projections.
Please note that references to earnings per share operating income and operating margin and our remarks around and adjusted basis unless otherwise noted.
For a reconciliation of these non-GAAP measures to their corresponding GAAP measures. Please refer to our earnings press release.
I'll now turn the call over to Donnie.
Thank you Meghan and as many of you know I've been of Tyson team member for close to 4 decades and in that time I plan every business segment.
We've always believed in our mission and the vision of John W. Tyson, who founded this company nearly a century ago because he wanted to find a better way to feed a growing country.
On my first earnings call as CEO I'm incredibly proud of stand alongside our team members to continue that legacy.
It's an interesting time to be in this industry and we have of leadership team that together can capitalize on the strength of this company and the opportunities ahead.
Let's begin with the view of our overall performance this quarter first our retail performance 12 consecutive quarters of retail share gains and our core business lines was driven by strength of our brands along with solid execution from our team. We are in a market that has demonstrated the strong demand for protein and people are reaching.
Most for brands They trust our billion dollar brands Tyson, Jimmy Dean and he'll share farms have driven strong share growth with consumers buying more than ever before.
And we saw in the third quarter growing volume and foodservice channel.
As reopening and recovery continue.
We saw an uptick from al its nationwide reflected and our sales, which we were up $1.3 billion for the quarter.
Our broad production and distribution net work is well positioned to meet this growing demand.
Third the diversity of our portfolio demonstrated its value during the quarter led by beef. We delivered an exceptional result, as the strong U S export demand coupled with ample cattle supply supported elevated margins and that business fourth we continued to build the financial strength. This quarter, we used higher operating cash flow to reduce.
Debt the steps, we've taken position us with a very strong balance sheet and high levels of liquidity.
And finally, we are investing and future growth across our portfolio, where the process of bringing 12, new plants online globally to address capacity constraints and growing demand.
And all Tyson delivered a strong quarter as we look to the future we want to build on these strengths.
Let's look at how we plan to do that first we have built a solid footing to drive consistent results.
Our strengths include a diverse portfolio.
Well, known and trusted brands and scale and meaningful markets and and exceptionally strong balance sheet.
Labor is our number 1 challenge. So we have continued our focus on improving our team member experience without compromising their health and safety.
We are accelerating efforts to make Tyson. The most sought after place to work because we know how important team members are to our business.
1 of the way that we're doing this is to accelerate our investments and automation and technology. This not only helps us to eliminate more difficult hard to fill task, but also re skill our labor profile to enable their contribution to more value added activities.
Third we are actively working to recover volume from pandemic lows and in doing so improve the reliability we offer our customers.
Dynamic and evolving channel demand continues to create operational complexities.
We took steps earlier this year to make our organization more responsive to demand signals and to accelerate our speed to market by getting our sales teams closer to their customers.
There is more to do however, and so our work here continues.
Fourth our focus on operational excellence and disciplined cost management is especially important during periods of continued market volatility and increasing inflationary pressures.
As you will hear today, we continue to be laser focused and making progress and restoring the competitiveness of our chicken segment. We are also accelerating actions across our enterprise to become more operationally excellent.
Finally, we will continue to optimize our balance sheet, which will give us optionality as we prioritize the delivery of shareholder value.
Turning to slide 5.
We improved our sales and earnings performance this quarter the results demonstrate the benefit of our multi protein multichannel portfolio sales.
Sales improved 25% and third quarter, and 8% year to date, reflecting the improved volumes, which are up 10% for the quarter and flat year to date.
It also reflects the effective pricing strategies and all of our segments. During this inflationary environment we.
We delivered strong operating earnings performance, resulting in approximately $1.4 billion and operating income for the quarter.
This represents an 81% increase compared to prior year and translates to $2.70 and earnings per share.
Our earnings reflect our 3 key priorities 1 to be the go to supplier for customers and consumers to to be the most sought after place to work and.
And 3 to be operationally excellent.
We want to be the most sought after place to work. This starts with an unrelenting focus on safety.
Every minute every shift every day health and safety have been and will continue to be our top priority. We have a history of using all of the tools at our disposal to protect our team members and the vaccine is no different.
As many of you will have seen last week, we announced the Tyson will require of COVID-19, vaccinations for our entire U S workforce by November 1.
We do this now because the Delta Varian is more contagious and getting vaccinated is the single most effective thing people can do to protect themselves their families and their communities.
We have raised wages and many markets to ensure we're competitive and are exploring other ways to make Tyson. The most sought after place to work and the communities where we operate for example, we are piloting childcare facilities at some of our plants and we of open medical clinics to make health care more accessible to the team members and their families.
And finally, we are accelerating investments in automation and advanced technologies to make team members' jobs easier.
We look forward to providing more detail on automation and technology roadmap at our upcoming Investor day.
We're taking aggressive actions to add new capacity to meet demand adjust our product mix by plant and match our portfolio more closely with customer and consumer needs. We're listening to our customers and are committed to improving the reliability of supply.
And the third quarter, we improve volume levels across all segments and.
And prepared foods, we continue to optimize our product portfolio remove processing and supply chain complexity and prioritize products with the highest demand, resulting in lower cost and better service to our customers and beef ample cattle supply heavier animal weights and strong demand have driven volumes higher year to day.
And pork our volumes are up year to date versus pandemic lows.
We are pleased to have additional capacity coming online at Eagle Mountain, and Utah, and Columbia South Carolina.
Both facilities are expected to grow our pre packaged beef and pork products.
And chicken volume decline year to day, despite improved foodservice demand led by <unk>.
We also saw sustained retail demand, including the frozen value added poultry category limited capacity and persistent labor challenges have impacted customer fill rates in this segment.
However, our new plant and in Humboldt, Tennessee continues to ramp up production, including harvest capacity. This ramp up is helping us improve customer fill rates.
Chicken remains of top priority for me and for our company.
We continue to execute against our roadmap to bring operating income margin to at least the 5% to 7% range by mid fiscal 'twenty, 2 and our goal has not changed and we remain committed to restoring top tier performance. We are making progress. The first imperative is to be the most sought after place to work of.
Outlined and the investments, we're making to enhance our team member experience and my earlier comments. The second imperative is to improve operational performance Lee.
Last quarter, we highlighted the impact of lower hatch rates on our chicken operations, we have begun to deploy new male parent stock where the stock has been deployed hatch rates are improving.
We expect the full rollout of this breeder stock to be complete this fall with harvest capacity improvements occurring by mid fiscal 'twenty 2.
Our rate of outside meat purchases has declined 25% versus last quarter, and we will continue to decline as hatch rates and utilization improve.
We have identified opportunities to reduce mix complexity across our chicken footprint, which will help us operate more efficiently the.
Final imperative is to service our customers on time and in full.
We're pleased by the continued share performance of our value added products like Tyson chicken Nuggets, crispy strips and air fried we gained share during the third quarter and the last 52 weeks.
Looking ahead, we expect further growth and as a result, we're investing and line upgrades and increased capacity to drive branded product growth.
We have increased prices to help offset significant raw material and supply chain cost inflation.
Pricing improved nearly 16% and the quarter versus the comparable period last year.
We will staff our plants service, our customers grow our business and be the best Chicken company period.
Part of being customer centric means being as efficient as possible and taking cost out where you can.
Without compromising our ability to execute against our strategic and operational priorities.
We have ongoing efforts across the business to reduce costs.
But we must also find new innovative ways to be better and stronger this means investing and advances like automation and artificial intelligence to deliver productivity gains and competitive advantage we.
We have already delivered strong productivity gains in fiscal year 'twenty, 1 across our business. We're looking to build upon the strength of those actions and the months and years to come which we will detail at the Investor Day later this year.
These improvements come at a time, when we are investing heavily and capacity expansions across segments to better partner with our customers and meet long term demand.
Now I'll turn the call over to Stewart to walk us through our financial results in detail.
Thank you Tony Let me turn first to summary of the total company financial results.
Sales were up approximately 25% in the third quarter.
Volumes were up 9.7%, primarily due to strength and retail and the ongoing foodservice recovery.
Average sales price was also up about 17% largely due to strong results in our beef segment, the mixed benefit from retail volume and the partial recovery of raw material inflation and net sales price of.
Operating income was up 81% and the third quarter due to continued strong performance in our beef business.
And in prepared foods also improved the irrespective segment earnings while pork earnings were down versus the comparable period a year ago.
Year to date operating income for the total company improved by 49%.
Earnings per share grew 93% and the third quarter due largely to strength in operating income.
Specifically within our beef segment.
EPS was up 61% on a year to date basis.
And we performed well despite the challenging operating environment that spanned tough labor availability.
<unk> inflation rate pressures on raw material costs global supply chain challenges and and evolving demand backdrop.
Slide 11, and bridges, our total company sales on a year to date basis.
We delivered growth and the retail channel along all reporting segments, which in aggregate accounted for more than $1 billion and sales of improvement over the year to date period and more than $300 million and the third quarter versus the respect of comparable periods.
Moving to foodservice sales of improved by approximately $1.3 billion and the third quarter, leading to a year to date improvement for the channel of nearly $1 billion compared to the same period last year.
Exports were up over 18% versus the comparable period led by beef, where sales improved by more than $350 million on a year to date basis.
Asia has been a key driver of beef exports strength.
We are also seeing some strength and industrial, particularly and beef and pork.
And finally year to date sales grew $79 million or approximately 6% and our international business. This business is a growth priority for Tyson and we continue to invest and develop further capacities and capabilities and new markets to meet growing global consumer demand for protein products current.
And capacity expansions across 7 international locations are expected to dramatically increase our fully cooked production capabilities.
These investments are fully aligned to our strategic growth priorities and when complete will enhance our international processing capacity by close to 30% versus fiscal 2020.
Overall, we're pleased with the company's topline growth year to date.
We are carefully managing the current inflationary pressures through pricing actions as well as commercial and operational excellence with emphasis on productivity and cost.
We know that a price recovery assets relative to inflation must be matched by equal aggressiveness on productivity.
Slide 12 bridges year to date operating income production inefficiencies and low labor availability resulted in total company volumes were roughly flat to the comparable period a year ago.
However, we are encouraged by the volume improvement we are seeing across our segments in the third quarter.
Price mix benefited substantially and the year to date period from price recovery of raw material cost inflation improved mix strong beef segment performance and continued retail strength across segments.
Operating income was partially offset by $2.2 billion and increased cost of goods sold for the period, reflecting meaningful inflation and raw material and supply chain costs.
Feed ingredients labor packaging and freight are all key components of this cogs increase which were working to mitigate.
On a comparative basis SG&A benefited from the $56 million loss and the year to date fiscal 2020 period as compared to a $55 million gain and the first quarter of fiscal 2021 associated with the cattle supplier incident.
This was in addition to certain reductions and trade spend and travel costs.
Moving into the chicken segment's results sales were $3.5 billion for the third quarter up 12%.
Volumes were also up in the quarter due to continued strength in retail and improving demand through food service and segment wide operational improvements.
And these were partially offset by Covid related production inefficiencies.
Average sales price is up 15% and the quarter due to favorable mix sustained retail volume and strong supply and demand fundamentals.
Our reported price improvement also reflects actions we took to cover the inflationary pressures seen from higher grain labor and freight costs.
Our conversations with customers on widespread inflationary pressures have been productive.
And we will continue to partner with customers to ensure we receive a fair return on our products, while working to deliver service levels and fill rates.
And meet or exceed their expectations.
Operating income was $27 million and the third quarter and $137 million on a fiscal year to date basis, both stronger than comparable periods a year ago.
This represents an operating margin of 1.3% year to date.
Fiscal year to date operating income was negatively impacted by $410 million of higher feed ingredient costs as well as $210 million of increased grow out of expenses and outside meat purchases.
For the third quarter of feed ingredients were $270 million higher while grow out of expenses and outside meat purchases were $110 million higher.
Segment performance also reflects net derivative gains during the third quarter of $125 million and $235 million on a year to date basis, both versus the respective comparable periods. These results are associated with realized gains as well as open positions.
Moving now to prepared foods.
Sales of $2.3 billion for the quarter up 14% relative to the same period last year.
Total volume was up 4.5% and the quarter with strength and the retail channel and continued recovery in foodservice.
Sales growth outpaced volume growth driven by the pass through of raw material costs, lower commercial spending and better sales mix.
Segment operating income was $150 million for the quarter up over 3% versus the prior year.
Year to date operating income was $633 million.
23% versus the prior year period.
Operating margins for the segment was 6.5% for the third quarter of decline of 60 basis points versus the comparable year ago period of slowdown and segment operating margins versus the same quarter last year were driven by significant increases in raw material input costs. However, on a year to date basis, our operating model.
And of 9.6% was up 170 basis points versus last year, driven by favorable pricing and lower commercial spend.
Demand for the balance of the year is expected to remain elevated in retail where the volumes continuing to exceed pre COVID-19 levels and foodservice continuing to recover during the third quarter core business lines experienced volume share growth of 90 basis points, while dollar share grew 70 basis points.
We continue to believe that the ongoing inflationary environment environment will create a meaningful headwind for prepared foods in the upcoming quarter.
Raw material costs logistics ingredients packaging and labor are all challenging our cost of production to offset inflationary pressure, we're focused on pricing revenue management and commercial spend optimization, while ensuring the continued build of brand equity through marketing and trade support.
Moving to the beef segment.
Segment sales of over $4.9 billion for the quarter up 36% versus the same period last year.
Key sales drivers included strong domestic and export demand for beef products with average sales price up 12% for the quarter.
We had ample livestock available and the quarter driven by strong front and supplies.
Mounting drought conditions, and the western United States cattle growing region as well as elevated cost of a grain also drove some catalyst supply liquidation.
We have good visibility into cattle availability through fiscal 'twenty, 2 and currently believe it will also be sufficient to support our customer needs.
Sales volume for the quarter was up year over year due to continued strong demand in contrast to a soft comparable period, a year ago, driven by lower production volumes.
We delivered segment operating income of $1.1 billion for the quarter.
This improvement was driven by strong global demand for beef products and of higher cut out.
Which were partially offset by higher operating costs of.
Operating margins for the segment improved 520 basis points to 22, 6% for the third quarter.
While our beef segment experienced tremendous results on a year to date basis, we are still not at optimal levels of capacity throughput within our beef plants due to labor challenges.
Meanwhile, drought conditions and elevated grain prices are creating incremental costs and risks of cattle producers.
Until these conditions stabilize and within the constraints I had mentioned, we will work to maximize our beef processing capacity to provide a reliable outlet for our livestock farmers and adequate product supply for customers and consumers.
Now, let's move on to the pork segment on slide 16.
Third quarter results reflect higher hog costs, and operating expenses that werent fully offset through the pork cutout.
Segment sales were $1.7 billion for the quarter up 54% versus the same period last year.
The sales drivers for the segment included higher average sales price due to strong demand, partially offset by a challenging labor environment.
Average sales price increased more than 39% while volumes were also up relative to the same period last year.
Segment operating income was $67 million for the quarter down 37% versus the comparable period.
Overall operating margins for the segment declined by 570 basis points to 3.9% for the quarter the.
The operating income decline was driven by higher hog costs and increased labor and freight costs.
And at the end of this calendar year, lower projected 2021, pork production and strong consumer demand are expected to support hog prices well above 2020 levels.
Slide 17 captures our financial outlook for fiscal 2021.
Given the continued strength and our beef segment and ongoing inflationary pressures that are partially being recovered through price.
And we're raising our sales guidance for the full year.
We now expect to deliver annual revenues and the range of 46 to 47 billion.
At the segment level, we expect our directional annual guidance to hold.
Key risks to the guidance include freight rates, the labor cost and availability grain cost and the chicken segment raw material cost per each of our businesses and continued export market strength, along with price volatility and commodity meats.
We're slightly revising our outlook on effective tax rate to approximately 22, 5%.
We continue to monitor the potential implications of new legislation.
And we do not currently expect to see impacts to our adjusted rate this fiscal year.
While our expectations related to liquidity are also unchanged liquidity during the third quarter improved substantially to $3.4 billion and has since benefited from $1.2 billion of pre tax proceeds from the divestiture of our pet treats business in early July.
We expect our COVID-19 related costs, which totaled $55 million and the quarter to be approximately $325 million for the year.
As a reminder, some of the costs that were previously described this COVID-19 related have evolved to become structural.
Turning to slide 18 and.
Pursuit of our priority to build financial strength and flexibility, we have substantially delever the business over the past 12 months.
Reducing leverage to 1.7 times net debt to adjusted EBITDA.
Investing organically and our business will continue to be an important priority and will help Tyson and increased production capacity and market capabilities.
Each of these levers individually and in aggregate we.
We will support strong return generation for our shareholders.
We will also continue to explore <unk> to optimize our portfolio through M&A through the lens of value creation and shareholder return.
Finally, we are committed to return cash to shareholders through both dividends and share buybacks and short we view of the cash generation capabilities of this business is the strong and diverse and.
And we expect our capital allocation framework to deliver solid returns for our shareholders in the future.
And with that I'll turn the call back to Donnie.
Thanks Stewart to close our priorities are clear and being the most sought after place to work being our customers go to supplier and doing so driving operational and functional excellence across all areas of our business.
There's a lot to be excited about we look forward to discussing where we're headed during our upcoming Investor day and hope you can join us.
Thank you for your interest today and Tyson foods.
Megan.
Thanks, Donnie we will now move to your questions. Please recall that our caution on forward looking statements and non-GAAP measures apply to both our prepared remarks and the following Q&A.
Operator, please provide the Q&A instructions.
Ladies and gentlemen at this time, we'll begin the question and answer session.
The ask a question you May press Star and then 1 using the Touchtone telephone.
To withdraw your question you May press Star and 2.
Please we do ask you please limit yourself to 1 question and 1 follow up.
If you do of additional questions you may reenter the question queue.
And once again that is star and then 1 to ask a question.
Our first question today comes from Peter Galbo from Bank of America. Please go ahead with your question.
Hey, guys. Good morning, Thank you for taking the questions.
Good morning, Peter Good morning.
Donnie maybe if we could just start reiterating the back half 'twenty, 2 chicken outlook of 5% to 7% and I guess just.
Based on your prepared comments a lot of things are starting to move slowly but in the right direction.
And I guess the question is just what prevents that from getting pulled forward a bit is it just that the.
Cash related issues, just take much more time, the automation doesn't kick in until later.
In the 'twenty, 2 or has something else changed incrementally and maybe really around the labor picture has it has it gotten worse kind of since the last time, we spoke.
Alright, Thanks for that question and Peter Let me, let me start with this.
As we think about the.
As we look forward the fundamentals of our business look good going forward and we have strong retail and foodservice demand.
We haven't changed our approach chicken is is our top priority for me and for our company.
And we continue to execute our plan that hasnt changed and that starts with staffing our plants and servicing our customers and we have to be the most competitive chicken business, but we also want to grow the business.
And we're committed to top tier performance.
We're committed to the 5% to 7% by mid of FY 'twenty 2 that we talked about earlier.
And we're committed to kind of and the most sought after place to work and we talked a lot of about that and.
And the prepared remarks, we've increased wages and this.
This includes the benefits up to $22 an hour.
<unk> instituted the flexible work schedules and shifts.
We're piloting childcare and on site health clinics for our team members and their families.
We're solving transportation problems for our team members, we're investing heavily and automation and technology and trying to automate those most difficult and higher turnover jobs.
I talked last time.
So you can understand the.
The basis of this the 7 levers of our business and chicken our price volume mix labor Youll spend and live and so let me touch on each of those for a moment.
And our live operations the.
Planned to improve hatches well underway the.
The new males will be in place by this fall as we talked about and <unk>.
We will see harvest capacity increased by mid fiscal 'twenty 2.
So here's kind of of the the formula.
Better hedge equals more birds, which equals more volume, which equals better service, which equals a better cost structure, which equals better performance and ultimately better results for us.
But until then.
To your point and your question, we are improving hedged and harvest volume net.
Even with these headwinds we are better than an average company by a sizable margin and our live production area and we will get sequentially better between now and mid 'twenty 2.
If I look at spin.
We talked a lot last time of outside purchases and.
And Stewart mentioned earlier that we've decreased debt by 25%, although at a higher price.
The thing that is challenging now as we're paying a lot of overtime because of inefficiencies the inefficiency associated with labor.
Which is absenteeism and turnover.
We've had inflation on all inputs.
We believe grain and our cost of goods will Chris and early Q4, and fact that has.
Based on the forward looking curves this is in our cost of goods.
We've seen great improvements and our cost management and our execution by our team much of that has been masked by inflation.
And then go to labor.
The labor is our single biggest issue, we face not only and chicken, but also and our other businesses.
We've increased wages and crew.
Created flexible shifts childcare onsite clinics the delta variant.
Has been a disruptor, we were 1 of good trajectory and and.
And then the Delta variant showed up and.
We've we've taken a step back as a result of that.
We've got plans to to mitigate that.
But the health and safety of our team members of our highest priority.
We are more inefficient than we have historically been.
Certainly a big.
The big part of what we have to solve but essentially it takes us 6 days to get 5 days' worth of work and <unk>.
And I'll tell you that the execution has improved sequentially through the year.
Our volume is up in the quarter.
Ted Thats weighted Thats our finished good sales.
Volume is negatively impacted by harvesting below plan, which we've talked about as a result of hedge we started this year with the plan to grow the business and grow our ahead and grow our sales.
But our byproduct and export sales our biggest misses and.
From a volume perspective.
We will see volume increase between now and 2000 and mid 'twenty 2.
And hedge and.
Head harvested and Thats and volume through our plants.
From a mixed standpoint, we've added volume.
Value added volume is very strong that's ready to eat products.
The par Fry product sets are frozen value added branded products.
That's the heart and soul of our business and chicken, we are at capacity with strong retail and food service demand.
As Stuart referenced earlier, we're adding lines and plants to address very strong demand of.
Our pricing is up 16% and the quarter.
Most of this increase came in June and even more and July.
We worked with our customers and they've been very responsive.
Our relationships are very strong with our customers.
We've been successful and getting pricing grain also at the same time as continue to escalate.
And the.
And pricing will certainly lagged the cost and this scenario.
We're just simply asking for fair market value for these products, but but long story short.
John.
We are executing better we're performing better.
We have a great deal of inflation led by Green.
But we've got and pricing around us and so as we move into every month and quarter from here I would expect us to be sequentially.
Sequentially better and.
And that 5% to 7% that we talked about the mid 'twenty 2.
We're committed to that and we stand with that number.
Great. Thanks, that's very helpful.
Just all of the detail there and then just for the follow up question Stuart I guess, what's changed in your prepared comments around prepared foods.
And last quarter I think you had talked about the inflation coming through maybe it's accelerated a bit but that you'd be kind of turning on and map spending and the back half of the year and maybe that wasn't the case and <unk> and more sort of <unk>. So is there just a change there and maybe when can we expect that to start to flow through more thanks.
Yes. Thanks look we did we did 10 map 1 and Q Q3. It was 1 of the it was 1 of the sort of downward levers as we as we had to dial back in the retail space. So it's already running through the numbers.
It was earlier and the way you saw the benefit and the back half of the EBITDA youre going to see the increases and Thats part of whats in our guidance.
And our next question comes from Ken Zaslow from Bank of Montreal. Please go ahead with your question.
Hey, good morning, guys good morning.
Just a quick follow up the.
The parent stock is being rolled out.
Fairly quickly, which is actually positive can you talk about how confident you are that it will take and that they will not be any issues that the hatch rates and the productivity will be in line with your expectations and just if there are any risks and how you see it and that's my first question.
Sure. Thanks, Ken.
Basically as you know we talked about the fact that this would be phased in starting.
And completing by.
Let's call it fall.
That work is underway, we have we have converted some of the mail stock and we've seen some results associated with that everything we have seen thus far would be and aligned with what we expected.
And we see no reason to expect the.
Any disruption from that.
So from that standpoint, everything looks good and it looks like it's on track to deliver what the.
The timing that we've talked about thus far.
Great.
Flipping to the other side east business.
For the last year or so between Covid and Unfortunately, you fire. It seems like there's been a lot of capital that just haven't been debt as quickly as people may have expected. So, although we may be going through and underlying.
The traction we're seeing.
To be a lot more cattle out there through probably at least through.
Through the winter and if not through 2022.
Would you agree with that would you kind of put parameters around that how do you see that and.
And then.
And as a follow up to that would be the exports side with China and Japan, the trade policies that seems to be and the shortage of Australian Steve It.
Seems like there's a duration to the export picture as well and.
And then I'll leave it there and I appreciate your time as always you.
You bet, Ken Let me, let me, let me say this and I think you are.
And your view of where we had ample cattle supplies and where we had really strong demand.
And we're constricted in the middle of based on the labor availability and I've talked about this and chicken earlier, but.
And our beef business. It essentially takes us 6 days to get 5 days' worth of work. So the inefficiency associated with that allowed cattle to back up on the ranch and and feedlots. So here's what we know.
As we look into 'twenty 2 fed supplies are expected to be down about a half a percent.
June cat alone feed is projected to be up 1.9% there has been some herd liquidation and the west and northern Plains.
Which according to cattle facts about 33% of the U S coal cash production is and this drought area.
And the 'twenty to 'twenty 2 is looking good is it going to be at the same level and which we were where we are.
And our at 'twenty, 1 probably not I don't think it will be that good I think it will be better than historical.
The returns but.
And I'm talking net 1% to 3%, which we've talked about forever it'll be north of that we think but.
But we think all in all of beef beef will have a very nice year and the 22 and.
In terms of export to the other part of your question Asian growth is still solid.
U S grain fed beef as preferred around the world.
And as you mentioned and key global beef suppliers are rebuilding hers, and Australia, and Brazil, and Canada. So all of that is true and.
So strong export.
Demand for us as well as domestic.
Greg I appreciate it as always.
Thank you.
Our next question comes from Ben Theurer from Barclays. Please go ahead with your question.
Thank you very much good morning, Donnie Stewart.
Question is on what the plans are within the prepared foods business just more structurally so clearly we're seeing how pricing is coming through and impacting your beef pork results, but that obviously puts a lot of pressure on prepared foods and you've talked about the input cost pressure by the end of the year.
So far we were running at about a 95 per cent range, but you've always talked about like the 10% to 12% range. So what is it what keeps you away from being more crescive from pricing within the prepared foods business to really pass on more of that internal inflationary pressure youre seeing on the ingredients side just to bring it back to the low teens levels.
I think guidance as well for years.
Load at 10% levels, just to understand what needs to be seen in the market, so you're going to be able to put pricing food.
Yes, that's of Great question Ben.
And we're still we're still very proud of our prepared foods business and and.
And if I look at the detail behind this demand is expected to remain elevated.
The retail orders for example are up 30% versus pre COVID-19 levels.
<unk> services, showing a sequential improvement as well.
We have seen and accelerating and unprecedented inflation. So what do you do about that.
<unk>.
And we have significant foodservice pricing already in the market.
Retail pricing will be and the market.
<unk> September 5th.
The inflation is up about 14% during our <unk> and 9% year to date.
<unk> had just like other businesses, we've had the labor and and.
And the.
Absenteeism and turnover in the business, we have a number of open positions. So that certainly has made us inefficient.
And so we've got aggressive pricing going out aggressive revenue management, Inc. And commercial spend management will help mitigate a portion of these inflationary impacts we will have to get more pricing.
But we're comfortable that over time that our prepared foods as a double digit business for us and.
It's just the.
Costs are hitting us faster than we can get pricing at this point.
Okay, Perfect and then my follow up question's around the capital allocation and you've mentioned.
M&A would be 1 of the opportunities. So could you without obviously going into specifics, but could you explore a little bit of where you think you would have to you would have to investors is on the international business is that the investing into new facilities over interest acquiring new facilities for the broadened the FTSE.
Brendan the certain segment just to understand the little bit where your focus would be from.
And from an M&A perspective.
Yes, Steve I'll take I'll pick that up.
Just in terms of the specifics from M&A I don't think we would talk to.
What specific places, we're going to put the money, but let's just talk about.
Overall, our view of of capital allocation first of all.
We really feel great about the current position of our balance sheet and our liquidity.
$3.4 billion coming out of the quarter that was before we took the receipt of the $1.2 billion.
From pet.
And we did repay about $500 million of the debt subsequent to the end of the quarter. So the balance sheet is very healthy from an investment standpoint, 1 of the things that we talked about both in the prepared remarks and.
And in last quarter is that we expect to invest behind our business.
The significant opportunity to invest and expanding our capacity and I spoke this morning about international debt that will be of growth area for us.
And the Capex thats going into the international space, and new facilities and will expand their capacity by 30% when compared to last year. That's that's the big deal.
And I think when you look at the rest of our business Donnie Donnie spoke this morning about automation and.
And youre seeing that both across prepared foods as well as as well as and our chicken business, which will certainly help our labor. It will help our efficiency and then you look at where we're putting money just behind in terms of the new facilities and humble It's gone live we've got and U K.
Cash operating facility in Utah.
Will be coming on line shortly as well as 1 and South Carolina, and so we've got a pretty active internal and Jan.
And then.
And if something on the outside presents itself that we think it makes sense for our investors and then we're going to.
We'll obviously take a look at that but hopefully that gives you a flavor of where we're investing our money.
Okay perfect. Thanks Stewart.
And our next question comes from Robert Moskow from Credit Suisse. Please go ahead with your question.
Hi, Thank you.
I got a couple of questions 1 on the on the retail side. Donnie you said that pricing is and is having trouble keeping up with the inflation, but you do have and increase coming in September.
To what extent does that fully offset all of the inflation you've seen the airport.
Do you need another price increase right after that because it's the upward sloping curve.
Yes.
Thanks, Robert and with what you said.
You quoted everything I said earlier.
And with retail with the branded portfolio.
It can take a little bit longer to get pricing in.
And we typically don't disclose that kind of information about when we would do it but.
But here's here's generally the way we think about this is that when raw materials went inputs go up pricing has to go up.
And particularly in an environment, where we have such rapid and accelerating the inflation.
We have little choice, but to go and too.
We certainly have to be competitive, but we certainly have to get pricing to cover the increase and inputs and and we're doing that and we're doing that very methodically.
We're looking at all of the the.
And the metrics around that as we do that but we're doing it and very responsible way and Noel o'meara and her team are managing that.
Around the clock.
Hum.
Okay.
So.
It sounds like it.
Well I'm not sure what that means Donnie like if if the inflation that you experienced in the middle of this year is being offset by pricing on September 5th likely say, but it sounds like inflation continues to rise is that it.
Can I say that that's a fair statement.
So maybe just a couple of things going on.
Just jump in and give you give you a couple of facts here actually if you looked at inflation. The biggest driver for pole of prepared foods is being the input costs of.
All of the commodities and of course for prepared foods debt debt, mostly as book.
<unk> got that of course, along with the increase and maps, and which which I referred to less so.
Terms of thinking about price I think what John is saying as and.
When we think the price debt commodities are going up all of any inputs the going up we're going to match that with pricing.
And that pricing may not follow exactly the track of of input inflation, but and you also need to think about how that input inflation can move along while we while we've got labor labor cost increases which are going into our cash.
And to our workforce you should think about those as more permanent of course, but you have seen the cycles around commodities and.
And you'll have to take a view of what you think pork.
The cost of pork will do over the price of the course of next year.
And for it comes off the and that'll be of help to US if growth doesn't come off and I think Donnie point is that we will continue to take price.
The match to match the nature of the cost that's coming to us.
Great.
I appreciate it and foodservice.
Obviously.
Continued sequential improvement and then big improvement versus year ago.
How are your customers doing the next 3 to 6 months do they view reopening pace.
Continuing to accelerate.
Or are there concerns about delta variant kind of slowing things down.
And and to what extent are you back to 2019 levels in terms of foodservice.
And our foodservice.
Everyone I've talked to based on the.
What we see from a demand perspective.
And there is very strong we're at or near.
And across all businesses and some are even above from foodservice from let's call it pre COVID-19 levels and and 19 so.
I don't know that anyone fully understand what's going to happen with the delta variant.
And then there is certainly some concern about that.
But everyone I talk to.
And food service is optimistic.
About the future and.
And for their businesses in particular.
Great. Okay. Thank you.
Our next question comes from and.
The <unk> from Stephens. Please go ahead with your question.
Hey, Thanks, so much good morning, everybody good.
Good morning, Ben.
And to ask about the decision to mandate, the COVID-19 vaccines and your facilities.
And really from the standpoint of knowing that labor is exceptionally tight.
Does that.
Great of dynamic where it potentially makes labor more tight.
Or is the net impact of that it gives you enough certainty around your ability to have continuity and running your facilities that and.
And some ways of kind of ring fences, the labor dynamic when you think about trying to get.
And the chicken margins back up and managing your plants at <unk>.
Targeted utilization range.
Sure. Thank you Ben.
As we've talked a lot even in our prepared remarks today, but.
And I didn't just start today, the health and safety of our team as our highest priority.
If you go back and look even in the.
And the beginnings of of.
Of the pandemic.
Tyson did a number of things to protect our team members in fact I would tell you we did everything we knew.
To do to protect our team members.
The highest priority from.
Masked mandates too.
Barriers within plants to social distancing.
2 staggering shifts too.
The temperature sensors and health screenings prior to go into work every day, we did everything that we need to do.
With the new debt.
Vaccine.
The new tool, we believe that vaccine is the most effective thing the most effective tool.
The available today, we've studied the data we've researched it to the.
Degree.
And we're confident and doing that and so we mandated debt because we thought it would be irresponsible not to do that and.
Irresponsible not to protect our team members and every way that we could now.
There could be some short term impacts.
But I think they certainly will be offset by a long term benefit and doing this and and so that's the position that we have taken and it's out of a.
Just in the abundance of caution and care for our team members.
Okay. Thanks for that.
My second question is on the chicken business you talked about the critical path to achieving the margin targets you have for middle of next fiscal year.
And I asked about it from a capacity utilization standpoint, I know you have humboldt coming online and ramping up the capacity and.
The years pass I think your your utilization rate has been 80, 990% or so when.
When you think about the full year for 2022.
And that too high of a watermark the hit on capacity utilization or should we think about maybe youre getting back to that level by the end of fiscal 2022, how should we think about the ramp of of.
Getting back to those utilization rates.
Yes, great question Ben.
A couple of things with respect to that.
And we started fiscal 'twenty 1 we.
We had plans in place to increase our harvest head based on capacity utilization based on demand that we already had.
And with the hatch issues and certainly that created the shortfall.
And in terms of head for our business and then we go outside and Star Bond as we've changed this mail out and.
We are starting to see the results of that will ultimately end up and more head for us to harvest and which is exactly our plan too.
We already have that product, so, but I would expect as we move into 'twenty, 2 and beyond that.
And that Youll see our capacity utilization increase.
The increase at <unk>.
And from a harvest perspective, and all of that will be and service to.
Supporting our value added.
Branded portfolio.
Okay, Thanks, and best of luck.
Thank you.
Our next question comes from Adam Samuelson from Goldman Sachs. Please go ahead with your question.
Hi, Thanks, good morning, everyone. Good.
Good morning, good morning.
Okay.
I guess my first question is really maybe on that last point Donnie around capacity utilization in poultry and I'm just trying to think about how quickly and how far you could push it and if I'm looking and the last 10-K based on a 5 day of week the.
And the poultry business within and 84% kind of operating rate and fiscal 'twenty.
I'd imagine it probably was leaking lower than that and.
In fiscal 'twenty, 1 given some of the hatch issues and.
And I'm trying to just Dimensionalize, I mean, where do we think that's actually going and.
And you guys are about 20% of the industry.
So if there's a meaningful change in your own internal production and.
Acumen and it starts to have some meaningful impact at the industry level of in terms of available line of supply.
Any way you can help frame that.
Sure Adam.
And I think you described it very well and.
And a lot of ways even answered this.
You talked about based on what you saw that it was 84% well obviously.
And 84% capacity utilization and of protein business is not a good number.
We acknowledge that it.
Certainly has cost implications.
For your product and.
The impact and can.
CPU uncompetitive in that space.
We acknowledge that.
So there's a number of we.
We need a number of head if you can do the math on how much outside of meat, we're purchasing based on volume and you can you could probably convert debt ahead I mean.
1 of the things that we.
And the equipment would tell you that.
And being able to run those.
Products through our plants and being able to to debone, those chickens and go into our further process assets.
And at the same time get credit for all of the byproduct through our ingredient solution group.
And then have the ability with our Wan Tyson approach to be able to to sell export leg quarters, and pause and and so forth.
And along with the.
Just the further processing volume increases that we would get all of that adds up to a much better cost scenario and a much better performance.
And our chicken business.
Okay.
That's really helpful and then the follow up and kind of an unrelated topic.
California has the prop 12 mandate.
And supposedly coming into effect on January 1st and has implications in terms of the pork that supplied into the into the California market and.
Wondering kind of how if at all we should be thinking about the impact of that both of your pork and prepared foods that whole foods until next year.
Great question Adam.
As we look at <unk> 12.
About 4% of total production assets.
Not significant for us today.
And.
And is currently of aligning incentivising suppliers where appropriate.
We can do multiple programs simultaneously.
Including the 12 so.
It's not something we were excited about but.
We can align suppliers and we can certainly.
Provide the raw material to service, our customers and that way.
Okay.
And the color I'll pass it on thanks.
Our next question comes from Alexia Howard from Bernstein. Please go ahead with your question.
Good morning, everyone.
It's James.
Okay can I ask the first of all about labor cost.
They're obviously escalating I think you talked about $22 an hour I'm just wondering how much of an increase you're expecting on a permanent basis I know the right now and over time and incremental payments, it's probably higher than the long term level, but I'm just trying to get a sense of how much it is going up relative to pre COVID-19.
Level.
So there is a there is a pretty significant increase and a pretty significant cost increase associated with that.
And a lot of respect the market is doing his job based on the availability of labor and is being and shorter supply.
It's going up and.
I don't see any.
I don't see any reduction in debt.
We believe we're in a good place we believe we are.
At the top of the market. If you will in terms of jobs similar to the this we certainly are very competitive and all of the communities where.
We have assets producing protein.
And so we're comfortable with where we are but it certainly increased but in order to get people into your production location.
It's more than just wage and.
And I don't want to make that clear we have to do other things and outlined the number of those things that we're doing around childcare transportation.
Onsite clinics.
Providing a safe place to work.
And flexible shifts and number of shifts and a week. It's the combination of all of those things and doing all of those things well and so when you hear us talk about being the most sought after the place to work.
Those of the type things.
That we have to do in order to be able to service our customers and to grow our business.
Great and as a follow up John.
A quick 1 of the $325 million and incremental Covid costs are expected. This year, you talked about that and proportion of that becoming permanent can you quantify that.
Yes, Alexia Stewart.
Look first of all the feel good about COVID-19 sequentially going down.
The 55 and I saw in the quarter.
And so that's about half.
And instead of progressive the progression of instead of being 50%.
And.
And would think over the course of the year.
The structural costs are going to be counted.
In and around 200 million or more.
So just but I understand that's in our run rate I'd say anything that is become structural youre already seeing it's flowing through the numbers I wouldn't think about that in terms of all of the sudden thats can be added to next year.
A lot of that is the other other.
Labor increases debt debt.
Donnie was talking to.
Very helpful. Thank you very much I'll pass it on.
And ladies and gentlemen, with that we will be concluding today's question and answer session.
Like to turn the floor back over to Mr. Donnie King for any closing remarks.
Thanks again for your interest and Tyson Foods, we hope you and your families stay healthy and safe and we look forward to speaking.
Again soon.
Have a great day.
Ladies and gentlemen, with that we'll conclude today's conference call. We do thank you for attending today's presentation.
May now disconnect your lines.